Last week’s eminently sensible suggestion by the Greens that Australian banks should pay fees to the Australian tax-payer for the policies that protect them has again illustrated the parlous state of Australia’s political economy.
First of all, why is it only the Greens that have suggested it? The government immediately reiterated its abdication on the issue, reinforcing its acceptance of GFC crisis measures as a new financial architecture. To its credit, the Opposition has suggested an inquiry to assess what the new financial architecture should be but where is it now?
Next cab off the rank is the Greens themselves who have made a major communications blunder in the framing of the debate:
Greens Deputy Leader and banking spokesperson Adam Bandt has outlined a proposal for a ‘Public Support Levy’ on the big four banks in return for the implicit “too-big-to-fail” policy of the government that underwrites their activities.
The 20 basis points levy on bank assets in excess of $100 billion has been costed by the Parliamentary Budget Office and would raise $11 billion over the forward estimates.
The levy mirrors similar levies in Europe that raise on average approximately 0.2% of GDP and is based on International Monetary Fund proposals.
“For many years, especially since the GFC, the big four banks have benefited from an implicit ‘too big to fail’ policy, as the IMF has made clear.”
“Under Labor, the big 4 banks are making more from mortgages, dominating more of the market and enjoying record profits.”
“Everything Labor has done has made it easier for the big 4 banks to make bigger profits off the backs of consumers.”
“It is time the big four banks paid a fair contribution for the public support they receive.”
“The big banks get a discount on their wholesale funding because of the ‘too-big-to-fail’ policy of the government. If they went to wall the taxpayer would bail them out, which means the big 4 get cheaper funds than their competitors, so the taxpayer should get a fair return for this de facto contribution to big bank profits.”
“The big four banks are taking all of the profits while the taxpayers are wearing all of the risk.”
“This moderate levy of 0.2 per cent is in line with IMF proposals and is a fair contribution from the banks for the support they are provided by taxpayer.”
“By limiting the levy to those big 4 banks that are truly ‘too big to fail’, the levy won’t be passed on to consumers as the big banks will face competition from smaller banks who aren’t paying the levy.”
“A levy of this size would be in line with a dozen countries in Europe and would assist in addressing the structural revenue problem in the budget.”
“Such a levy would improve bank competition, going some way to equalising the wholesale funding advantage government policy gives systemic banks over smaller institutions.”
The IMF has recommended charging a fee equivalent to 70% of the funding cost advantage enjoyed by systemic institutions. (IMF, Australia: Addressing Systemic Risk through Higher Loss Absorbency – Technical Note, Nov 2012)
The use of the word “levy” was a very bad idea. “Levy” is close enough to “tax” to allow the banking apologists of the Australian business media to immediately associate what is actually an insurance premium with a “super-profits tax”. Stephen Bartholomeusz, Malcolm Maiden and Andrew Cornell are all examples.
The Government’s primary too-big-to-fail policy is the idled wholesale guarantee, which may have been paid for at the time (but was far too cheap) and has not been paid for ever since, despite contributing to a 2-notch upgrade in bank credit ratings. There are any number of other policies that can be seen in a similar light: RBA CLF, covered bonds, free deposit guarantees, dwelling purchase incentives, RMBS purchases, high immigration and changes to FIRB rules, fiscal incentives for property investment, highly opaque capital rules and policing, and on it goes. But let’s not worry about those today!
Don’t get me wrong, public support for banks is appropriate. The argument needs to be about what kind of support and how it effects the functioning of the market. Support has been at extreme levels since the GFC. Not even the banker’s association bothers to deny that. It focused instead on the costs to shareholders (voters):
Steven Münchenberg, Chief Executive of the ABA, said: “The majority of bank profits are paid through dividends to Mum and Dad shareholders and superannuation funds. Taxing banks’ profits reduces those returns for working Australians saving for their retirement through superannuation accounts and to retirees who are increasingly dependent upon positive business profit growth.”
“Last year, banks paid out a record $19 billion in dividends – 7% more than 2011. In the past five years, banks have paid out $82 billion in dividends.”
“The other impact of the Greens policy would be that banks may need to pass on higher costs to consumers because of the need to maintain profitability. So consumers may end up paying more for banking products and services.
This is not an argument of course. It is a simple threat that creating an appropriate framework for banks will come at the expense of a large block of the voting public. But public policy should not be in the business of protecting shareholders. It’s job is to set appropriate parameters for a functioning market, whatever the particulars of that sector need to be.
My own view is that whatever the benefits derived from the extreme levels of unpaid for support currently surrounding the banks are a false economy. Without the insurance premium you are creating a very active moral hazard that makes an expensive financial crisis more not less likely. Nor is it good enough that we rely on an opaque regulator in APRA to hold back this moral hazard.
More broadly, this debate should be about what is the appropriate structure and charge for the insurance premium in the national interest? That’s the strategic question that the nation needs to answer first. The effects upon sectional interests are tactical and implementation questions only, a distant second.